Buyer Seller Relationships

Buying and selling are the two main parts of all business activities. All business concerns aim at earning revenue from the sale of the products that they buy in finished form or in the form of raw materials from others at a lesser cost. They look for buyers and sellers and buyers simultaneously. Other than this, business concerns look for sellers through whom they can take their products and services at the doorsteps of customers. They look for markets and shops where they can supply their products for sale. On the other hand, before launching a product in the market, they make an idea about the market and buying capacity of the people of the area where they are planning the launch. It is also very essential for them to have a thorough idea about the level of demand for a particular product in a particular idea.

Buyers and sellers in mature industrial markets can turn single transactions into long-term beneficial relationships by a deeper understanding of the complex connection between the two. A "must-do" for the sellers, in particular, is to understand patterns of investment and reward, and effectively manage the process that defines the dynamics of buyer-seller evolution.

Three pertinent questions that bedevil researchers involved in the understanding of buyer-seller relationships are:

1) From the supplier's viewpoint, does it pay off to be in long-term customer relationships?

2) If yes, how do you as the supplier get started? 

3) If you the supplier are in an arm's-length transactional relationship, how do you move it into a fuller relationship?

For the first puzzle, Narayandas and Manu Kalwani of Purdue University teamed up for an empirical study later published in The Journal of Marketing. In their study, Narayandas and Kalwani created matched pairs of firms. They compared the firms' performance over six years. What they found: in the beginning of a relationship, suppliers enjoyed no significant difference in sales, inventory holding and control costs, gross margins, or return on investment.

But later, two of the numerous developments they saw included:

1) Suppliers increased sales over time. "If you get in with fewer customers for a long time, you get a greater share of wallet from the fewer customers" (as opposed to more mass market customers)

2) Manufacturing costs went down. "Even in long-term relationships, opportunism is always shown. Customers still are opportunistic, customers still look out for themselves."

Jump Starting a RelationshipTo launch a long-term relationship, one party can "take the hit and wait it out"—usually the supplier. This is what was dubbed the "all at once" approach. Or better, the supplier can attempt a "foot-in-the-door" approach, by skillfully managing the relationship. "Rather than going after the entire volume, break up the needs into different parts, and try to initiate a relationship using one component, selling only this one component," Prof. Narayandas advised. For a foot-in-the-door product to be successful, it should boast five qualities, he said:

Modularity. There has to be a natural progression from one part to another—some connection.

Healing power. It has to solve an important, visible customer pain.

High quality. The supplier must be confident of its performance; there can be no problem. First impressions are the last impressions if they're not good ones, he said.

Ease of use. The customer has to be able to evaluate the product. Even if you're sure of the quality, if the customer doesn't understand what you're doing it's not going to work.

Fair price. It must not be too expensive for the customer.

From transaction to commitment

"The process always has to be initiated by supplier," Narayandas emphasized. The road is bumpy at first. The distributor tells the customer, "I want to give you lower prices, which will come at the expense of my markets. What I want you to do is give me higher volumes." The customer, typically, does not offer higher volumes but instead begins to cherry-pick. The suppliers' costs, meanwhile, just go up. While the customer is getting more value, only one party—the distributor—is actually working at the relationship.

"But if you do things the right way, then there comes a day when the customer begins to see benefits," said Narayandas. "More importantly, the customer now begins to realize that taking a hands-off approach in the relationship is actually detrimental. Even the slightest effort they put in will lead to much more value for them. "That's when they begin to invest. At some point, the customers begin to give more volumes."

"It doesn't happen from day one, much as you want it to," he said. "A lot of work and planning need to go into it. So make sure you get through the investment phase at the beginning—investing in skills and systems—and figure out how long to invest and pull out [if necessary]

Buyer-seller evolution

To study how relationships evolve in mature industrial markets, Narayandas and HBS professor V. Kasturi Rangan took an in-depth look over time at three buyer-seller relationships, all in commodity markets. The three pairs represented different parts of the value chain: supplier-manufacturer, manufacturer-distributor, and manufacturer-customer.

"In any relationship, the dependence that each side has defines the initial balance of power in the relationship," he said.

"The interesting thing we found, unlike what others have done in marketing, is that trust and commitment form at two different levels. Trust forms between people, between individuals. But commitment forms between firms."

A positive feedback loop can be the result. "Once people begin to trust one another across the buyer-seller firms, they begin to take actions that begin to achieve balances in the contract terms on a routine basis," he said.

Even though firms may start out on an uneven playing field, as they wrote in their paper, "We believe that less-powerful firms can structure and thrive in equitable relationships with more-powerful partners." Ideally, it may even lead to a match made in business heaven.

Conceptual Model of Salesperson-Buyer Dyadic Relationships

Salesperson-Customer Relationship

Salesperson Customer

Role requirements and Characteristics

Personal Characteristics

Personal Characteristics

Role requirements and Characteristics

Personal Affiliation

AdjustmentNeeds & Expectations Needs & Expectations

Choice of Strategy Choice of Strategy

Negotiation

Adapt Adapt

Exchange

StopExperience Experience

FeedbackFeedback

Five-stage buyer-seller relationships evolution processStage of relationshipdevelopment

Activities

Stage 1Pre-relationship stage

Search for potential partners from outside and inside sources.

Evaluate and select potential partners based on social and economic aspects.

Finding more information and cross-checking partners’ competency.

Matching needs and capabilities.Stage 2Early stage

Make initial contact. Establish rapport with partners. Testing for compatibility of partners. Determining and defining mutual goals.

Stage 3Development stage

Joint planning of activities, responsibilities and relationships.

Develop personal relationship and trust. Direct involvement through regular contact and

socialisation. Little commitment towards trial trading activities. Adaptations and adjustments through agreement,

negotiation and self control.Stage 4Long-term stage

Increased commitment and recognition of mutual benefits through institutionalised conflict resolution process.

Development of inter-organisational and member adaptations.

Ongoing trading activities.Stage 5Final stage

Long term rewards based on mutual behaviour and trust Termination based on extent of mutual interest and cost

benefit analysis of continuing in the relationship

The first stage of the evolution process, pre-relationships concerns with the evaluation of new potential suppliers. At this stage, buyers begin to gather information on potential suppliers and evaluating the contents to determine if a relationship can be developed In the early stage, relationships between both buyers and sellers are likely to have minimal experience of one another but through direct contact with each other, this provides the opportunity for them to exchange information in order to make tangible and intangible investment. Doing so can further explore the potential of the relationship and reduce the buyer’s perceived risk and improving supplier’s creditability.

At the development stage, commitments to the learning processes and investments are agreed between buyers and sellers, to ensure the relational continuity. During this phase, communication and trust continue to grow, leading to increased co-operation and established common goals.

The long-term stage describes the adoption of on-going business exchanges routines between buyers and sellers that can only be achieved through mutual attraction, trust and commitment.

The final stage aims to manage the interactions in order to minimise uncertainty and to apply sanctions (such as termination) that discourage the interruption of the business relationship. Often if the termination of a relationship is to occur, it will be based on the level of dissatisfaction, the switching cost involved and the cost benefit effects.

On the whole, the buyer-seller relationship is seen as an evolution process to: (1) Increase experience of both buyers and sellers, (2) Minimize uncertainty in the relationship, (3) The development of both actual and perceived commitment,(4) The formal and informal adaptations, and investment and savings involved in both buying and selling organizations.

Matching Professional Buyers with Professional Sellers

Some of the key principles employed for this purpose are:

1. Stay focused on the truth that clients are not buying your costs; they’re buying outcomes, value, and utility. Help your team understand that there is no relationship between cost and value. Your cost should not become your price. Stop estimating and start pricing. Stop negotiating cost and start negotiating value.

2. Use the language of utility and value in place of the language of costs. Construct new business presentations in a way that showcases benefits, outcomes, utility, value, and outputs rather than features, hours, inputs, activities, and efforts.

3. Approach every compensation dialog with this question: how can we align our economic incentives? Make it clear you don’t view compensation as a zero-sum game. Instead of fighting with your client for a bigger slice of the pie, find ways to grow the pie.

4. Signal to your client early in the process that you’re willing to walk away. You’ll never have any leverage in a negotiation the client believes that you’ll do anything to get the business. It’s counterintuitive, but wanting them less makes them want you more.

5. Insist on transparency of expectations in place of transparency of costs. Show how it’s in the client’s best interest to discuss expected outcomes instead of expected costs. Costs are the seller’s concern, not the buyer’s.

6. Match their process with your process. Early in your discussions, introduce the fact that you also have a process: Scope of Value before Scope of Work.

7. Use the principle of anchoring to get a better price. The first figure named in a negotiation has the effect of shifting the other side’s expectations of what it will have to pay. In a very real sense, the more you ask for, the more you get. Above all stop practicing reserve-anchoring, which results from raising the possibility of discounted rates which actually lowers price expectations.

8. Package your services and solutions in a way that makes them difficult to compare. Remember that there is margin in mystery. By offering services or expertise not found at other firms, you can command premium pricing. Make your margins on the high-value services you provide -- things that clients can’t do for themselves. Stop trying to earn profits on the commoditized side of your business. Keep in mind that the buyer’s job is to level the playing field. Your job is to make your service offering incomparable.

9. In new business, extend your creative thinking to include compensation. There are countless ways to construct compensation agreements. Falling back to cost-plus is not only ineffective; it’s incredibly unimaginative for a professional advisor.

10. Never lower price without also stripping out value; it destroys your pricing integrity. If you reduce the price, you must also strip out value. Remember that buyers always seek to reduce price, but not necessarily value. If you’re tempted to discount, keep in mind that the only winner in a price war is the buyer.

DETERMINANTS OF THE STABILITY OF COOPERATIVE BUSINESS RELATIONSHIPS

Interaction process between buyers and sellers in industrial markets comprise not only economic exchange but also social exchange in general.

Social exchange theory by Thibaut and Kelly

This theory suggests two standards for the evaluation of relationship outcome and, therefore, value:

1. Comparison Level

– It arises out of the sum of own experiences in relationships and knowledge concerning other relationship which one has observed or read about.

– Relationship outcome above CL are relatively satisfying and those below CL are perceived to be unsatisfactory.

2. Comparison Level for alternatives

– It is defined as best currently available alternative to the present relationship.

– The less the probable outcome in current relationship exceeds CLalt, the more the partners will be tempted to leave the relationship.

Investment Model:

It suggests that commitment to a relationship is not only determined by relationship satisfaction and available alternatives but also by the investments put into it.

Equity theory

The theory states that an equitable relationship exists if all participants, in terms of inputs into and outcomes from the exchange, are receiving equal gains.

Hypotheses from the above theories:

1. The more present relationship value exceeds the comparison level, the higher will be the degree of satisfaction.

2. The more the present relationship value exceeds the comparison level for alternatives, the higher will be the commitment towards the relationship.

3. The higher the degree of relationship satisfaction, the higher will be the commitment towards the relationship.

4. The higher the commitment towards the relationship, the more stable relationship will be.

5. The more extrinsic non-retrievable investments are tied in a relationship, the higher will be the commitment towards the relationship.

6. The more intrinsic non-retrievable investments are tied in a relationship, the higher will be the commitment towards the relationship.

7. The more equitable a relationship, the higher will be the degree of relationship satisfaction.

8. The longer the duration of a relationship, the higher will be the commitment towards the relationship.